Punjab-Haryana High Court
Sahukara Bank Ltd. vs Income-Tax Officer, Ludhiana, And ... on 25 February, 1966
Equivalent citations: [1966]62ITR745(P&H)
ORDER
DUA, J. - The petitioner, Sahukara Bank Ltd., Ludhiana, had some branches in Pakistan before partition. As a result of partition, the bank was faced with great difficulties, with the result that a scheme under section 153, Indian Companies Act, was presented to this court which was sanctioned in due course. Some Muslim depositors had also dealings with this bank and one Mohammad Akram of Ikram-Ullah and Sons had an account with the bank at Ludhiana in the name of Messrs. Army Stores Supplying Company. It is common case of the Parties that this firm had a deposit of Rs. 10,266-7-6 as on January 1, 1948, with this bank. As a result of partition, the Muslim customers migrated to Pakistan. It appears that this customer owed to the income-tax department a certain amount on account of tax. In 1959, the Income-tax Officer, Ludhiana, wrote to the bank enquiring if there was any account with them of Mohammad Akram of Ikram-Ullah and Sons in the name of Army Stores Supplying Company. The bank replied in December, 1959, that they had one account in 1948, which, along with the accounts of other Muslim depositors, who had migrated to Pakistan, had been transferred to Lyallpur books of the bank and they had no account in the books of the bank at Ludhiana. On December 9, 1960, the Income-tax Officer sent a notice to the bank under section 46(5A), Indian Income-tax Act, 1922, requiring the bank to deposit in the Government account of the assessee, Messrs. Army Stores Supplying Company, the amount of Rs. 10,000 or more standing to the credit of the assessee with the bank. It appears that some further correspondence passed between the parties and the manager of the bank, who was summoned under section 37 of the Indian Income-tax Act. In January, 1962, a tax recovery certificate is stated to have been issued by the Income-tax Officer, "F" ward. Ludhiana, for the recovery of Rs. 12,104.37 nP. to the petitioner bank as arrears of hand revenue in respect of the tax due from Shri Mohammad Akram of Messrs Army Stores Supplying Company, Ludhiana. It is against these proceedings that the present petition has been presented by the bank under articles 226 and 227 of the Constitution.
According to the return, the bank had admittedly a sum of Rs. 10,226-7-6 with them standing to the credit of Messrs. Army Stores Supplying Company, Ludhiana, which was actually entered in the books of account at Ludhiana. On June 29, 1948, the petitioner bank even debited an amount of Rs. 2 on account of incidental charges to this account maintained at Ludhiana at that time. According to the statement of account maintained by the bank, this amount was transferred to Pakistan, as, according to the banks own admission, its branches in Pakistan had ceased to function on the partition of the country. The transaction of transfer is described to be a sheer paper transaction made with the object of evading the banks liability. On August 20, 1951, the total tax demand of Rs. 12,102.87 nP. was assessed against Messrs. Army Stores Supplying Company in Bazar Kharadian, Ludhiana, for the years 1942-43 to 1948-49.
The petitioners submission strongly pressed before me on the authority of P. Rajeshwaramma v. Income-tax Officer, Nellore, is that, once the bank denied that any money was due from it to the assessee, the Income-tax authorities ceased to have any jurisdiction to proceed under section 46(5A) of the Indian Income-tax Act, 1922, whereas, on behalf of the revenue, it has been canvassed with equal force that on the banks own showing this paper transaction of transfer is not genuine and is a mere sham. Neither has the amount been paid to the customer nor is it being paid to the revenue on behalf of the assessee. There being no law under which the bank could have transferred this amount to Pakistan and indeed, in fact and in substance, the amount having not been transferred, the revenue is entitled to proceed under section 46(5A). The learned counsel has tried to get assistance from a decision of the Supreme Court in Delhi Cloth & General Mills v. Harnam Singh.
Shri Aggarwal has also raised the plea of time-bar basing it on section 467 of the Indian Income-tax Act. This plea is met by the respondents by submitting that the recovery proceedings against the assessee were started within one year from the last day of the financial year and, in any case, the bank cannot urge this plea in answer to the present proceedings. The third point raised by Shri Aggarwal is that the scheme framed by the bank in 1948 covers the State Demand, though the Muslim customers who had gone to Pakistan were not covered by it. Shri Awasthy has controverted this submission and in the alternative tried to meet this point with the submission that if, according to the bank, the scheme covers the demand of the revenue, then it was for the bank to pay to the revenue 80 per cent. of the amount of the deposit in accordance with the terms of the scheme. The bank, according to the learned counsel, cannot keep the money to itself and decline to pay either to the customer or to the revenue on behalf of the assessee.
The points raised are, in my opinion, of some importance and are also bare of authority. The writ petition has been pending for more than two years. It is, therefore, desirable that this writ petition be decided by a larger Bench at the outset. Attempt should be made to secure the orders of my Lord the Chief Justice with due promptitude so that the petition may be disposed of within one month from today.
[The case was heard by a Division Bench composed of INDER DEV DUA and N. S. NARULA JJ. and the judgment of the court was delivered on 25th February, 1966, by N. S. NARULA J.] ORDER OF THE DIVISION BENCH N. S. Narula J., - The main question involved in this petition under article 226 of the Constitution filed by the Sahukara Bank Ltd., Ludhiana, hereinafter referred to as the bank, is about the effect of mere denial of liability by a garnishee to whom a notice under section 46(A) of the Indian Income-tax Act (11 of 1922), hereinafter called the 1922 Act, has been issued by an Income-tax Officer and about the scope of that section.
The bank was incorporated under its present name in 1924 and thereafter continued to banking business with branches at various places including the one in Gujranwalla and another in Lyallpur, both of which places are now in West Pakistan. In the wake of partition of the country under the Indian Independence Act, the Gujranwala branch of the bank was burnt down by rioters on or about August 12, 1947. Round about the same time, the Lyallpur branch of the bank was reported to have been looted. On and with effect from August 14, 1947, the bank abandoned all its assets in the territory now know as Pakistan and has not thereafter been able to resume work in those branches. On account of the restrictions imposed by the Foreign Exchange Regulation Act, 1947, no money could be transferred out of India to Pakistan or to any other country without the permission of the Reserve Bank of India after the passing of that Act in 1947. The Indian branches of the bank continued to do normal business including the meeting of liabilities towards its Muslim customers till May 6, 1948. On or about May 11, 1948, the bank submitted an application under section 153 of the Companies Act, 1913, to the East Punjab High Court at Simla for the sanction of a scheme framed by it. The High Court duly sanctioned the scheme on or about July 16, 1948, copy whereof is annexure "A" to the writ petition. Admittedly, the manner of disposal of the deposits of the Muslim evacuees in the Indian branches of the bank was not specifically dealt with in the scheme. Regarding the deposits in the Pakistan branches of the bank by persons other than Hindus and Sikhs, the directors of the bank were authorised by paragraph 14 of the scheme to modify the arrangements in such manner as they might consider proper. Under the said scheme the amount to the credit of every depositor residing in India as on May 6, 1948, was to be reduced by 20 per cent. and the balance 80 per cent. was made payable in prescribed instalments extending over a period of five years. The petitioner - bank states that, as a result of the working of the bank in relation to the closed fund, it has already paid out about 70 per cent. of the amounts due to its Indian depositors. It is not disputed that the bank submitted a similar petition for sanction of a scheme of arrangement to the Lahore High Court in respect of its Pakistan branches but that the said petition was rejected as the Lahore High Court insisted on all the Muslim depositors being paid in full by transfer of the banks funds from India. This was not possible because the Punjab High Court had held that no assets or funds of the bank in India could be removed out of this country for payment to creditors in Pakistan and an injunction issued by the Lahore High Court against the bank restraining the bank from making payments to its creditors in India till all the creditors in Pakistan had been paid out, was declared by the Punjab High Court to be illegal and ineffective.
Messrs. Mohammad Akram Ullah and Sons were carrying on business at Ludhiana prior to the partition of the country. One of the business carried on by them was in the name and under the style of Messrs. Army Stores Supplying Company in Bazar Kharadian, Ludhiana. The firm was assessed to income-tax. There was an account in the name of Messrs. Army Stores Supplying Company in the Ludhiana office of the bank in which there was a credit balance of Rs. 10,266-7-6 on January 1, 1948. On June 22, 1948, a sum of Rs. 2 had been debited by the bank to that account on account of incidental charges. That was the last entry in the said account. A total tax demand of Rs. 12,102.87 nP. was raised against the said assessee by the income-tax authorities on August 20, 1951. This demand related to the assessment years 1942-43 to 1948-49. Demand notices were issued to the assessees in respect of those assessments on August 20, 1951. Since no payment of any part of the demand was made, a recovery certificate was issued by the assessing authority on March 12, 1953, to the Collector, Ludhiana, for the recovery of the above said arrears. Recovery proceedings against the above named assessees have been pending since then. Mohammad Akram alias Akram Ullah had also been carrying on business in Ludhiana under the style of Messrs. Akram Ullah and Sons.
On July 28, 1959, the Income-tax Officer, Ludhiana, wrote to the manager of the bank in exercise of his powers under section 38(5) of the 1922 Act to intimate to the Income-tax Officer if Mohammad Akram or Akram Ullah, Proprietor of Messrs. Akram Ullah and Sons, had any account with the bank and, if so, to intimate the amount to the credit of that party. By letter dated August 4, 1959, the bank replied to the Income-tax Officer as follows :"
We have to advise that we do not appear to have any account in our books in the name of Shri Mohammad Akram or Akram Ullah, Proprietor, Messrs. Akram Ullah and Sons, Ludhiana."
On December 24, 1959, the Income-tax Officer again addressed the bank. In that communication it was stated that from enquiries made by the Income-tax Officer it had transpired that Akram Ullah maintained a current account with them in the name of Messrs. Army Stores Supplying Company and that the amount to the credit of that party was more than Rs. 10,000. Information about that exact amount standing to the credit of Messrs. Army Stores Supplying Company was sought through the income-tax inspector who was deputed to obtain the same personally. The reply of the bank to the abovesaid letter was couched in the following language :
"... We beg to advise that we had an account in the name of Messrs. Army Stores Supplying Company, Bazar Kharadian, Ludhiana. The account along with other Muslim accounts who opted to Pakistan was transferred there, as was done by other banks also.
Accordingly, we have no account in the name of the said concern in Indian books."
In its abovesaid letter dated December 24, 1959, the bank took up a definite position. It has never disowned that factual position thereafter. In this letter the bank did not state that the amount in question was not due from the bank to assessee. Nor did the bank state that it did not hold any money for or on account of the assessee. On the contrary, the bank clearly admitted that it had an account of the assessee though the balance to his credit was no more entered in the Indian books of the bank but purported to be entered in the Pakistan accounts of the bank.
In the above situation the Income-tax Officer issued a notice dated January 9, 1960, under section 46(5A) of the 1922 Act to the manager of the bank wherein it was stated the a sum of Rs. 12,102.87 nP. was due from the above-named assessee and that the bank was called upon to pay any amount due from the bank or held by it on account of the said assessee up to the amount of the abovesaid arrears. The formal notice under section 46(5A) of the 1922 Act in the prescribed form bearing the seal and signatures of the Income-tax Officer was forwarded to the bank with covering letter No. 15920 dated January 12, 1960, in continuation of the previous correspondence. This was the first formal notice to the bank under section 46(5A). The banks reply to the abovesaid notice containing its objection against it was dated March 5, 1960, and was in the following terms :
"You have issued the notice under section 46(5A) under the assumption that a sum of Rs. 10,000 is due to Shri Mohd. Akram of Shri Ikramullah & Sons, Proprietor, Army Stores Supplying Co., Bazar Kharadian, Ludhiana. We informed you in our letter dated 24th December, 1959, that nothing is due or held by us relating to the above party and, therefore, the demand made by you under section 46(5A), is inoperative. Your attention is invited to the provisions of section 46(5A), last paragraph of which states that where a person to whom a notice under this sub-section is sent, objects to it on the ground that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for and on account of the assessee, then nothing contained in this section shall be deemed to require such persons to pay any sum or part thereof, as the case may be, to the Income-tax Officer. Since there is no amount due to the said defaulter from us, you have no jurisdiction to demand an assumed sum from us or to take any action under section 46 of the Income-tax Act.
We, therefore, request you to kindly cancel all the proceedings contemplated by you under section 46."
It is significant to note that even in this letter containing the final objections of the bank the factual stand taken by it was the same as in its earlier letter dated 24th December, 1959 to which specific reference had been made again. The rest of the contents of the letter were mere arguments based on the said stand. This position is clear from the following sentence in the above-quoted letter :
"We have informed you in our letter dated 24th December, 1959, that nothing is due or held by us relating to the above party and, therefore, the demand made by you under section 46(5A) is inoperative."
By letter dated March 30, 1960, the Income-tax Officer called upon the bank to intimate the amount standing to the credit of the assessee before the alleged transfer of the account to Pakistan and also about the authority under which the alleged transfer had been effected. An evasive reply was given by the bank in its letter of the same day wherein it was stated that the manager of the bank was busy in court in those days and that he would reply to the Income-tax Officers letter in the first week of the next month. The Income-tax Office then proceeded to remind the bank on 25th of April, 1960, that no reply had been received from the manager as promised by the bank. Once again the reply of the bank was not straight-forward. In its letter dated May 7, 1960, the manager of the bank wrote to the Income-tax Officer that the matter was receiving the banks best attention. In his letter dated May 18, 1960, the Income-tax Officer called upon the bank under section 38(5) of the 1922 Act to furnish the requisite information within three days. The banks reply dated May 21, 1960, to the abovesaid letter was that they were already searching their old records and collecting the necessary data and that, on completion thereof, the requisite information would be submitted, though this would take at least seven or ten days more. After having sent some more reminders, the income-tax authorities sent their inspector to obtain the information personally on the authority of a letter dated August 2, 1960. In reply to the same, the manager of the bank wrote on August 6, 1960, as follows :
"With reference to your letter of the 2nd instant we beg to state that our record is locked in ejectment proceedings. The information called for will be submitted on its release."
The Income-tax Officer followed up the matter by various remainders including the one dated June 26, 1961. In reply thereto, the Manager of the bank wrote to the Income-tax Officer as follows :
"With reference to your letter No. 2875 dated 26th June, 1961, and in reply thereto, we beg to state that as the undersigned was busy in some domestic work so it could not be dealt with earlier. We are contacting our legal adviser in this matter and on receiving his advice the needful will be done as per his instructions."
Tired of the manner in which the bank was behaving, the Income-tax Officer sent a letter dated October 29, 1961, to the bank wherein it was stated that the Income-tax Officer was satisfied that the amount to the credit of the assessee in question still lay in the custody of the bank which the bank had not paid in spite of service of the notice under section 46(5A) of the 1922 Act and, therefore, calling upon the bank to pay Rs. 10,000 to the Government, out of the said account. The bank again remained silent. By letter dated dated December 6, 7, 1961, the Income-tax Officer afforded the bank a final opportunity to pay the amount in question or to convince the Income-tax Officer with necessary evidence on or before December 13, 1961, that no amount was due by the bank to Shri Mohammad Akram of Messrs. Army Stores Supplying Company. It was added in the letter that, in the absence of any satisfactory explanation or keeping silent over the matter, it would be presumed by the Income-tax Officer that the bank had no explanation to offer and that the liability in question stood admitted by the bank. In reply to the above-said threat, the bank wrote to the Income-tax Officer on December 11, 1961, that the matter had already been referred to Shri V. N. Vasudeva and Company at Delhi for their advice and that the bank regretted its inability to supply any information or explanation in the matter before hearing from the said advisers.
On January 3, 1962, the Income-tax Officer issued a summons under section 37 of the 1922 Act to the manager of the bank to appear before the income-tax authority on January 18, 1962. The manager duly appeared in pursuance of the said notice and gave the requisite information to the Income-tax Officer.
In the above circumstances, the Income-tax Officer passed detailed order sated January 24, 1962, recapitulating most of the above-said facts and holding the bank in default in not complying with the notices issued to it under section 46(5A) and in its having failed to comply with the notice under section 37 of the 1922 Act. The Income-tax Officer directed in that order that proceeding under section 46(2) of the Act may be taken against the bank. A recovery certificate under section 46(2) of the 1922 Act for the recovery of Rs. 12,102.87 nP. was thereupon issued by the Income-tax Officer to the Collector against the bank. The recovery certificate was forwarded to the Collector with a covering letter dated January 24, 1962. By letter dated February 14, 1962, the Special Assistant Collector, 1st Grade (Recovery of Income-tax), wrote to the manager of the bank to deposit a sum of Rs. 10,000 in question in the State Bank of India, Ludhiana, within five days from the receipt of the letter failing which further proceedings would be taken against the bank. The bank then sent letter dated February 17, 20, 1962, through its advocate, Shri V. N. Vasudeva, to the Income-tax Officer, wherein it was stated that a reference to the banks balance-sheet showed that there was no such account in their books (in Indian branches) and, therefore, the question of payment did not arise. An objection was taken against the recovery proceedings on that account. The bank also wrote letter dated nil (copy annexure "A") to the Income-tax Officer, wherein it again reiterated its stand in the following words :
"We have already filed our objections that no amount is due to Shri Mohammad Akram from the bank in India within the terms of the scheme of the Punjab High Court sanctioned on 15th July, 1948. As we have repeatedly denied our liability and hold no money on behalf of Shri Mohammad Akram in India we submit that the provisions of section 46(5A) are not applicable."
In the banks reply (annexure "I") dated February 16, 1962, to the Special Assistant Collector, it again raised the objection that the notice of the Income-tax Officer was inoperative "because the bank had never accepted any liability in India of any amount due to a Shri Mohammad Akram of Messrs. Army Stores Supplying Company, Ludhiana." In the same letter it was again repeated that reference to the banks balance sheet would show that there was no such account in the banks books in its Indian branches."
The Special Assistant Collector, 1st Grade, wrote to the bank on December 6, 1962, to pay up the amount in question failing which action under section 221 of the Income-tax Act, 1961 (hereinafter called the 1961 Act), would be taken against it. Copy of that letter is annexure "F" to the writ petition. The bank did not comply with the notice. The Collector (Income-tax Recoveries Officer) thereupon issued notice dated March 12, 1963, to the bank to pay up the amount. By letter dated March 28, 1963, (annexure "K") the bank took up the stand that it was not in default of payment of any income-tax.
It appears that when it became absolutely impossible for the bank to evade the requisite payment any further, it came up to this court on or about October 31, 1963, by way of this petition to quash all the recovery proceedings against the bank including the various notices and recovery certificates and to restrain the respondents (the Income-tax Officer, the Collector and the Special Assistant Collector) from taking any proceedings against the bank for the recovery of the amount in question due from the above-named assessee. The writ petition was admitted by the Motion Bench (Falshaw C.J. and Harbans Singh J.) on October 31, 1963, and the recovery proceedings were ordered to be stayed meanwhile.
In his written statement dated 16/18th December, 1963, the Income-tax Officer has denied that the credit balance of Rs. 10,266-7-6 had been transferred by the bank to the book of its Lyallpur branch and has further stated that a thing could not have been done under the law even if it had been sanctioned by the High Court. It is Also averred in the written statement that, according to the copy of the account supplied by the bank to the Income-tax Officer, the sum of Rs. 10,266-7.6 was due at the time of the moratorium in May, 1948, to the assessee and that the bank had even debited the incidental charges to the said account of the assessee in June, 1948, while the account was maintained at Ludhiana. The written statement proceeds to point out that, according to the statement of account furnished by the bank, the amount in question was transferred to its Lyallpur branch on 3rd December, 1949, and that the bank had failed to show any authority from the assessee for such transfer nor shown how such a transfer could be made within the scheme sanctioned by the High Court. It has further been denied that there was any valid transfer of the deposit in question from the banks Ludhiana head office to its defunct branch in Pakistan. The Income-tax Officer has also pointed out in his written statement that the bank failed to show its alleged Pakistan books of account in which the credit in question may be standing.
When this case came up before my learned brother Due J. on November 26, 1965, it was ordered to be heard by a large Bench as the points raised by the petitioner are of some importance and are also bare of authority.
Before noticing the rival contentions of the parties, it is necessary to state that the learned counsel for both sides expressly agreed that the question of validity and legality of the entire impugned proceedings and orders had to be decided in this case according to the provisions of the 1922 Act and that the 1961 Act is not relevant for that purpose. It is on the basis of this assumption, which even otherwise does not appear to be incorrect, that we have proceeded to decide this petition. At the time of the issue of the impugned notices, it was the 1922 Act which was in force. By operation of section 1(3) of the Act of 1961, the latter Act (Act 43 of 1961) came into force only on and with effect from April 1, 1962. By section 297(1) of the new Act, the 1922 Act was repealed. Section 297(2)(j) of the 1961 Act provides that, notwithstanding the repeal of the 1922 Act, any sum payable by way of income-tax etc., may be recovered under the new Act but without prejudice to any action already taken for the recovery of such sum under the repealed Act. It is on account of this provision that the respondents have taken up the stand of the impugned proceedings being governed by the 1922 Act. The petitioner appears to have chosen the old Act as its provisions are more beneficial to him. If the 1961 Act were to be applicable to the proceedings in question, the petitioner has practically no case at all on the main point argued before us. This is because of the changed phraseology and enlarged scope of section 226(3)(vi) of the 1961 Act, which corresponds to section 46(5A) of the 1922 Act.
We may not, however, be understood to have pronounced in the agreed inapplicability of the new Act to the impugned proceedings in the circumstances of this case.
I may now proceed to consider the arguments of Shri Chiranjiv Lal Aggarwala, the learned counsel for the bank. It is firstly contended by him that the entire impugned recovery proceedings against the bank are wholly without jurisdiction as these are barred by time. The argument is that the demand against the original assessee having admittedly been raised on August 20, 1951, the notice under section 46(5A) (copy annexure "RA. 1") issued on January 9, 12, 1960, is beyond the time allowed by section 46(7) of the Act. The said provision reads as follows :
"Save in accordance with the provisions of sub-section (1) of section 42, or of the proviso to section 45, no proceedings for the recovery of any sum payable under this Act shall be commenced after the expiration of one year from the last day of the financial year in which any demand is made under this Act :
Provided that the period of one year herein referred to shall - (i) where an assessee has been treated as not being in default under section 45 as long as his appeal is undisposed of, be reckoned from the date on which the appeal is disposed of;
(ii) where recovery proceedings in any case have been stayed any order of a court, be reckoned from the date from which the order is withdrawn;
(iii) where the date of payment of tax has been extended by an income-tax authority, be reckoned from the date up to which the time for payment had been extended;
(iv) where the sum payable is allowed to be paid by instalments, from the date on which the last of such instalments was due :
Provided further that nothing in the foregoing proviso shall have the effect of reducing the period within which proceedings for recovery can be commenced, namely, after the expiration of one year from the last day of the financial year in which the demand is made.
Explanation :- A proceeding for the recovery of any sum shall be deemed to have commenced within the meaning of this section, if some action is taken to recover the whole or any part of the sum within the period hereinbefore referred to, and for the removal of doubts it is hereby declared that the several modes of recovery specified in this section are neither mutually exclusive, not affect in any way any other law for the time being in force relating to the recovery of debts due to Government, and it shall be lawful for the Income-tax Officer, if for any special reasons to be recorded he so thinks fit, to have recourse to any such mode of recovery notwithstanding that the tax due is being recovered from an assessee by any other mode."
There is no doubt that if no recovery proceedings had been commenced against the assessee prior to March 31, 1953, the impugned proceedings and notices would have been ultra vires section 46(7) of the 1922 Act and would have been liable to be struck down on that short ground. It is, however, not disputed that a recovery certificate had actually been issued in this case by the Income-tax Officer against the assessee on March 12, 1953, as deposed by the Income-tax Officer in his written statement. The original record of the recovery proceedings has also been placed before us by the learned counsel for the respondents and we have verified from the same that the assertion made in the written statement of the respondents to the above effect is correct. Most of the dates and particulars of the communications exchanged between the Income-tax Officer and the bank referred to in an earlier part of this judgment have also been taken by us from the said original record. We had to do so because the copies of the various communications produced by the petitioner with the writ petition were either incomplete or incorrect, and some of the important letters had not been placed on record by either side. In view of the recovery certificate issued against the assessee on March 12, 1953, the impugned certificate issued against the bank on January 24, 1962, is within time. There is, therefore, no force in the first argument of Mr. Aggarwala.
The second reason given by the learned counsel for the bank as to why the recovery proceedings against it are barred by time is based on certain provisions of the 1961 Act. It is argued by him that the time allowed for payment under section 220(1) of the new Act being 35 days, and the bank having admittedly not paid the amount within 35 days, it became a defaulter (an assessee in default) within the meaning of section 226(3) (i) and (x) of the new Act. The learned counsel argues that, once the bank in found to be an assessee in default, the recovery certificate issued against it on January 24, 1962, is hit by section 231 of the Act as it was issued after the expiry of more than one year of the date on which the bank became a defaulter.
Section 226(3)(i) and section 231 of the 1961 Act read as follows :
"226(3)(i) The Income-tax Officer may, at any time or from time to time, by notice in writing require any person from whom money is due or may became due to the assessee, or any person who holds or may subsequently hold money for or on account of the assessee, to pay to the Income-tax Officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount.....
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Income-tax Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax due from him, in the manner provided in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of the powers under section 222.
231. Save in accordance with the provisions of section 173 or subsection (7) of section 220, no proceedings for the recovery of any sum payable under this Act shall be commenced after the expiration of one year from the last day of the financial year in which the demand is made, or, in the case of a person who is deemed to be an assessee in default under any provision of this Act, after the expiration of one year from the last of the financial year in which the assessee is deemed to be in default.
Explanation 1 :- The period of one year referred to above shall be reckoned -
(i) where an assessee has been treated as not being in default under sub-section (6) of section 220, as long as his appeal is undisposed of, from the last day of the financial year in which the appeal is disposed of;
(ii) where recovery proceedings in any case have been stayed by any order of a court, from the last day of the financial year in which the order is withdrawn;
(iii) where the date of payment of tax has been extended by an income-tax authority to another date, from the last day of the financial year in which such other date falls;
(iv) where the sum payable is allowed to be paid by instalments, from the last day of the financial year in which the last of such instalments is due.
Explanation 2 :- A proceeding for the recovery of any sum shall be deemed to have commenced within the meaning of this section, it some action is taken to recover the whole or any part of the sum within the period hereinbefore referred to."
We have no hesitation in repelling this contention of the learned counsel for the bank on various grounds. Firstly, the argument is not open to Mr. Aggarwala as at the outset he has asked us to consider the entire case in the light of the old Act and has voluntarily conceded that the new Act has no application to this case. Having done so, in order to derive the benefit the provisions of the old Act, he cannot be permitted to go over to the new Act for any other purpose. Secondly, the plea on which this argument is based involves disputed questions of fact which were not raised before the Income-tax Officer and on which necessary findings of fact are, therefore, not available on the record before us. Thirdly, the relevant plea has not been specifically taken up even in the writ petition. Fourthly, it appears that the recovery certificate having been issued against the original assessee on March 12, 1953, the present proceedings are not barred by time. Fifthly, it appears to us that the case falls within the purview of Explanation 2 to section 231 (reproduced above). The sixth reason for rejecting this contention of the bank is that, in any case, under Explanation 1 (iii) to section 231, the extended dates fell within the last day of the financial year before the issue of the recovery certificate. From whatever angle the argument is tested, is tested, it has no force.
A third argument was then sought to be advanced by Mr. Chiranjiv Lal to show that the proceedings against the bank are beyond time. This argument is based on the provisions of section 34(3) of the 1922 Act, which sub-section reads as follows :
"(3) No order of assessment or reassessment, other than an order of assessment under section 23 to which clause (c) of sub-section (1) of section 28 applies or an order of assessment or reassessment in cases falling within clause (a) of sub-section (1) or sub-section (1A) of this section shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable :
Provided that where a notice under clause (b) of sub-section (1) has been issued within the time therein limited, the assessment or reassessment to be made in pursuance of such notice may be made before the expiry of one year from the date of the service of the notice, even if at the time of the assessment or reassessment the four years aforesaid have already elapsed :
Provided further that nothing contained in this section limiting the time within which any action may be taken or any order, assessment or reassessment may be made, shall apply to a reassessment made under section 27 or to an assessment or reassessment made on the assessee or any person in consequence of or to give effect to any finding or direction contained in an order under section 31, section 33, section 33A, section 33B, section 66 or section 66A."
We have not allowed the learned counsel to dilate on this aspect of the case as it admittedly involves disputed questions of fact (referred to in paragraph 23(i) of the writ petition and the written statement) and the said question was admitted not raised in the objection proceedings initiated by the bank before the Income-tax Officer nor has this legal aspect of the question been raised specifically in the writ petition. This disposes of all the arguments on the first contention of the bank, i.e., the question of limitation.
The second and main point involved in the case does not present much difficult on the particular facts of this case. The argument advanced on behalf of the bank is that, in view of the phraseology of section 46(5A) of the 1922 Act, the income-tax authorities have no jurisdiction to proceed against the bank as a garnishee once the bank raises an objection to the effect :
(i) that the sum demanded is not due by the bank to the assessee, or ii) that the bank does not hold any money for or on account of the original assessee.
The argument is that, once any of the above-said two objections is raised by a garnishee, the 1922 Act does not permit the income-tax authorities to look further towards the garnishee at all howsoever false or mala fide may be the plea of the objector on merits. Section 46(5A) of the 1922 Act reads as follows :
"46(5A) The Income-tax Officer may at any time or from time to time, by notice in writing (a copy of which shall be forwarded to the assessee at his last address known to the Income-tax Officer) require any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee to pay to the Income-tax Officer, either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the taxpayer in respect of arrears of income-tax and penalty or the whole of the money when it is equal to or less than that amount.
The Income-tax Officer may at any time or from time to time amend or revoke any such notice or extend the time for making any payment in pursuance of the notice.
Any person making any payment in compliance with a notice under this sub-section shall be deemed to have made the payment under the authority of the assessee and the receipt of the Income-tax Officer shall constitute a good and sufficient discharge of the liability of such person to the assessee to the extent of the amount referred to in the receipt.
Any person discharging any liability to the assessee after receipt of the notice referred to in this sub-section shall be personally liable to the Income-tax Officer to the extent of the liability discharged or to the extent of the liability of the assessee for tax and penalties, whichever is less.
If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Income-tax Officer, further proceedings may be taken by and before the Collector on the footing that the Income-tax Officers notice has the same effect as an attachment by the Collector in exercise of his powers under the proviso to sub-section (2) of section 46.
Where a person to whom a notice under this sub-section is sent objects to it on the ground that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then, nothing contained in this section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, to the Income-tax Officer."
In support of this contention of the bank its learned counsel has cited before us the judgment of a learned single judge of the Andhra Pradesh High Court (Bhimasankaram J.) in P. Rajeswaramma v. Income-tax Officer, Nellore. In that case a notice was issued under section 46(5A) of the Act to P. Rajeswaramma. Soon after receiving the notice, a written objection against it was filed on the ground that no sum was due from the objector to the assessee and that no amount was held by the alleged garnishee on account of the assessee. This factual position was contested by the department. The objector came up to the Andhra Pradesh High Court and it was held by the learned single judge of that court that, even on the assumption that the objections of the garnishee had not been established, the threat of the Income-tax Officer to proceed against the garnishee in the face of the above objections was contrary to law. Taking into consideration the objects of the introduction of sub-section (5A) in section 46 of the 1922 Act as described in the report of the Income-tax and Business Profits Tax (Amendment) Act, 1948, was passed, the learned judge held that sub-section (5A) of section 46 is intended to apply only to an admitted liability. The ratio of the judgment is contained in the following passage :
"Where a person admits by word or conduct that any money is due to the assessee or is held by him for or on account of the assessee, he becomes liable to pay it and may well be exposed to the penal provision which enables the Income-tax Officer to take further proceedings before the Collector on the footing that the notice issued has the same effect as an attachment by the Collector in exercise of his powers under the proviso to sub-section (2) of this section..... Where, however, the person to whom the notice is sent denies that any money is due from him, then the Income-tax Officer cannot take any further proceedings under this sub-section even though the denial may not be true. Mr. Kondaiahs contention is that the last clause applies only to cases where the person to whom the notice is sent is raising a bonafide objection, an objection which is true and not false to his knowledge. In such a case, he contends, it is open to the authorities to ascertain and find whether, as a matter of fact, any money is or is not due to the assessee and resort to the coercive process if it be found that there is a debt due to the assess. I am not prepared to accede to this contention. If the position taken up by Mr. Kondaiah were right, then the authorities acting under the Act would be armed with what seems to me a very extraordinary power; they would be able to decide questions of liability of third persons to the assessee. There is nothing in the language of the sub-section which points to such a result. It seems to me that the interpretation I am inclined to put is also in consonance with principle because the legislature could hardly have meant to entrust the officers of the department with the jurisdiction to decide questions relating to the existence and quantum of such liability - matters which are normally within the purview of civil courts."
In the case before us the contention of the bank is that the circumstances of this case fall squarely within the last paragraph of sub-section (5A) of section 46 as the bank has taken up the requisite objection in writing on the receipt of the impugned notice. On the other hand, the learned counsel for the revenue pleads that the case falls within the preceding sub-paragraph of that sub-section.
Substantial change has been made in the phraseology of section 226(3)(vi) of the 1961 Act (as compared with section 46(5A) of the 1922 Act), which provision reads as follows :
"226(3) (vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then, nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Income-tax Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent of the assessees liability for any sum due under this Act, whichever is less."
The counsel for the bank argues that the above-quoted provision in the new Act involves a conscious and deliberate departure from the relevant part of section 46(5A) of the old Act. On the other hand, Mr. D. N. Awasthy, the learned counsel for the income-tax department, has submitted that the change in the provisions has been made by way of clarification to avoid the interpretation of even the old provisions in the manner in which it was looked at by the Andhra Pradesh High Court. In my view, the relevant change in the above-said provision corresponding to the last part of section 46(5A) of the 1922 Act has created new rights and liabilities and is merely by the way of clarification. The powers, if any, conferred on the Income-tax Officer under the 1961 Act in this connection cannot therefore be imported into the 1922 Act.
I am also in substantial agreement with the view expressed by the learned judge of the Andhra Pradesh High Court in P. Rajeswarammas case, though I may not be prepared to go to the extent to which that judgment is capable of being understood. It appears to be correct that the phraseology of sub-section (5A) of section 46 of the 1922 Act does not appear to arm the income-tax authorities with jurisdiction to decide factually disputed questions of liability of the garnishee to the original assessee. That does not, however, mean that the provision exonerates a garnishee of his liability to the income-tax authorities by merely denying his liability to the assessee though expressly admitting that he holds the requisite amount of the assessee in his hands which he does not owe to any other person and in which the garnishee claims no personal interest. In any case, it is no defence whatever to the notice under section 46(5A) of the old Act to say that the assessees amount is held by the garnishee but, by a transfer entry, the garnishee has taken the amount out of its books at the station at which the attachment is sought to be effected, to its books, at the same station, relating to a branch outside the country. That precisely is the sum total of the objection of the bank in this case. The bank admits that a sum of Rs. 10,266-7-6 belonging to the original assessee was in deposit with the bank and is held to the credit of the assessee. The stand taken by it is that after a certain date, in December, 1949, the amount has been transferred to the Pakistan branch of the bank. It may also be remembered that the amount was not in fact physically sent anywhere from Ludhiana but it was only by book entry that the alleged transfer was effected. Even that book entry is within the head office books at Ludhiana. It is admitted that no branch of the bank has ever functioned in Pakistan after the 14th of August, 1947. Nor does the bank have any control over anything that might have been salvaged from its Pakistan branches after the August 1947 riots. There is, therefore, no disputed question of fact which the income-tax authorities had to investigate or to decide in order to fix the liability of the bank or to exonerate it of its liability under sub-section (5A) of section 46. Under legal terminology, the only objection of the bank was that the situs of the debt due by it to the assessee had shifted from Ludhiana to Pakistan. According to the law laid down by their Lordships of the Supreme Court in Delhi Cloth and General Mills Co. Ltd. v. Harnam Singh, the obligation of a bank to pay its customers rests primarily on the branch at which he keeps his account and a customer must make a demand for payment at the branch where his current account is kept before he can have any cause of action against the bank. A debt has been held by the Supreme Court in Harnam Singhs case to be property in form of a chose-in-action. Their Lordships have held that a debt being intangible cannot have location except notionally and, in order to give it notional position, rules have to be framed along arbitrary lines. Applying the tests laid down by the Supreme Court, it appears to be clear in this case that the intention of the original assessee was that the amount deposited by him at Ludhiana would be repayable to him by the bank at Ludhiana. Admittedly, no instructions have been given by the original assessee to the bank to transfer the amount to any other place. The situs of the debt in dispute in the instant case is, therefore, in the circumstances referred to above, Ludhiana, and no other place. In this conclusion I am also supported by a Division Bench judgment of this court (G. D. Khosla C.J. and Mahajan J.) in Okara Grain Buyers Syndicate Ltd. v. United Commercial Bank Ltd., wherein it was held that, when a bank closes its branch, the assets and liabilities of that branch go over to the head office and the persons who have claims over the branch have to lodge those claims with the head office. The learned judges further held that in the case of a bank deposit, whether current or otherwise, the demand for its return has to be made at the branch where the deposit was made and, if such branch is no longer functioning, then the demand has to be made at the head office of the bank. The original assessee had made the deposit at Ludhiana. The head office of the bank is also at Ludhiana. In any case, the Pakistan branches of the bank have ceased to function. It is therefore, wholly futile for the bank to contend that, merely by making a book entry, the amount had ceased to be due to the original assessee at Ludhiana but has started being due to him at Lyallpur in Pakistan. The bank has never taken up the position in its written objections at any stage that the sum demanded from it is not due to the assessee but to some one else. Nor has the bank denied that it does not hold the amount in question for or on account of the assessee. The only thing that it emphasised all along in writing is that the amount stands transferred to the account of Pakistan branches of the bank. To bring out to the surface this definite stand of the bank, I have underlined the relevant words in the various communications addressed by the bank from time to time, while reproducing them in this judgment. The bank has all along admitted the relevant facts and has only questioned the book entries and not the factum of the amount being available with it. In one way the banks case appears to fall squarely within the ratio of the judgment of the Andhra Pradesh High Court in Rajeswarammas case. The bank has, by word as well as by conduct, admitted that a sum of Rs. 10,264-7-6 (the last balance on January 1, 1948, minus the incidental charges debited to the account in May, 1948) is due by it to the assessee, as it is said to be held by the bank in its books of account at Ludhiana relating to its Pakistan branches (though not held in its books relating to the Indian branches). The bank has, therefore, become liable to the Income-tax Officer for the amount in question. In this view of matter, it does not appear to be necessary to decide the larger question involved in the main contention of Mr. Aggarwala. But even if it becomes necessary to do so, I would hold that if a garnishee takes up a wholly mala fide stand regarding its liability by admitting that the amount in question is held by it and does not claim any personal interest in the amount or the interest of any other person but merely states that he denies liability because of the entries relating to the amount having been transferred from one book to another, it would be open to the income-tax authorities to attach the amount. The income-tax authorities are not authorised by section 46(5A) to decide any bona fide dispute about the factum of the amount being available with the garnishee or not. Nor would the Income-tax Officer have jurisdiction to decide the liability of the garnishee to the assessee in case the liability itself is factually in dispute. But the denial, in order to prevail against the income-tax authorities, must be factual, unambiguous and bona fide.
Mr. Aggarwala emphasises the fact that in written objections dated March 5, 1960 (annexure "G"), the bank had denied its liability. Mr. Awasthy rightly points out that even in the written objections dated March 5, 1960, the bank has clearly based itself for the factual position on its communication dated December 24, 1959. On the admitted facts of this case it is necessary to read the two communications (letters dated December 24, 1959, and March 5, 1960) together. Both these letters taken together imply a clear admission of the bank to the assessee and a further admission that the bank holds the said amount but it sought to be stated that the amount is not payable in India but in Pakistan. This does not amount to a valid objection within the scope of sub-section (5A) of section 46 of the 1922 Act and does not exonerate the bank from its liability to the income-tax department for the amount of the assessee held by it. In paragraph 17 of the writ petition it has been stated by the bank that, as soon as it had raised an objection about its liability, the Income-tax Officer should have got the question decided from a competent civil court. On the other side it is also admitted by Mr. Awasthy that in case some valid objections which fall within the scope of the last sub-paragraph of section 46(5A) of the 1922 Act are raised by a garnishee, the only way open to an Income-tax officer to proceed further in the matter is to have the dispute adjudicated upon by a competent court of original civil jurisdiction. Even if, therefore, a valid objection had been raised by the bank, the force and effect of the same was subject to the ultimate decision of a civil court.
The third contention of the learned counsel for the bank is that, even if it was open to the Income-tax Officer to go into the controversy, he should have held, on the facts of this case, that the bank could not be compelled to part with the amount in question under section 46(5A). In view of the findings already given by me in connection with the second contention raised by Mr. Aggarwala, I find no force in this argument and hold on the facts of this case that the defence taken up by the bank in reply to the impugned notice is not valid and does not avail the garnishee. No other point was urged by the counsel for the petitioner in this case. The writ petition, therefore, fails and is dismissed with costs.
Petition dismissed.